Stephanie Link: The Case for Coke
By: Stephanie Link | 02/18/14 - 04:49 PM EST
NEW YORK (TheStreet
) -- Coca-Cola (KO)
shares are down almost 4% today following its disappointing 4Q results. Underneath the surface there were puts and takes to the quarter but investors are focused on the disappointing 1% total volume growth for the quarter (expectations were for 2-3%) and the 1% decline in North America volumes, even though Europe posted the first year-over-year increase since the third quarter of 2012 and Eurasia/Africa results continued to show above average growth, besting expectations at 6% growth.
The big question on whether to invest in Coca-Cola or not is if you believe it can offset the declines that are being seen in the Carbonated Soft Drink (CSD) market - which is the main culprit for the disappointing results - especially North America, as consumers are focusing on healthier drink choices.
But Coke is really more than just a North American story and more than a CSD company. Some 79% of its operating profit comes from international markets, with a good chunk of that coming from emerging markets - roughly 55% of its total operating income. I think the international results were encouraging in the quarter but, more importantly, it's the secular trends in emerging markets that are more important because, over time, these are going to increase in importance for the company as higher consumption trends are driven by higher income levels.
In volumes, India grew 8%, China increased 3%, Eurasia and Africa increased 6%, Japan rose 1% and although Latin America posted a 3% drop, it posted the ninth consecutive quarter of share gains in this region. The CSD slowdown is something to watch but it is well known at this point - shares have massively lagged, rallying just 14% last year (vs. 32% growth for the S&P 500) and are down 9% year to date. Plus, Coke has been focused on expanding into juices, waters, teas, and sports/energy drinks and continues to put up solid growth - in 4Q the company saw 6% global worldwide still beverage volume growth and 5% growth for all of 2013.
In North America, while CSD volumes fell 3% in 4Q, still beverages rose 4%. This is clearly where the company has been focusing its effort. It continues to gain market share and, given its strong global brands, pricing power, the size and scale of its business and its strong balance sheet, the results should improve and drive overall higher performance at the company over time. I fully expect Coca-Cola will also continue to do deals, M&A and joint ventures to increase its growth opportunities - like the deal announced two weeks ago with Green Mountain Coffee (GMCR)
In addition to reiterating its long-term earnings metrics on today's call, Coke also announced a new $1 billion cost cutting program (supply chain efficiencies and IT functionality). This will help drive better earnings in the medium term and help bridge the gap towards its longer term goals of upper single digit earnings, 3-4% volume growth and 5-6% sales growth. At the current price, shares aren't exactly cheap on an absolute basis at 17.6x forward estimates, but it does trade below its 5 year and 10 year averages and at a discount to its rival Pepsi (PEP)
. It yields 3% currently and I fully expect the company to raise this in the near term. Management has an excellent track record of delivering cash to shareholders - it has plans to buy back $2.5 billion to $3 billion (following 2013's $3.5 billion - which was at the high end of its guide) and in February 2013 it raised its dividend, marking the 51st
consecutive annual increase.
I think the sluggish results from KO are an opportunity for long term investors looking for quality, international growth, and continued shareholder returns.
--Written by Stephanie Link in New York.